The Limits of Autarky:
Regional Networks and Industrial Adaptation
in Silicon Valley and Route 128

AnnaLee Saxenian
Department of City and Regional Planning
University of California at Berkeley
Berkeley, CA 94720-1850
anno@socrates.berkeley.edu

Prepared for HUD Roundtable on Regionalism sponsored by the Social
Science Research Council, Dec 8-9, 1994. This paper summarizes some of
the themes of Regional Advantage: Culture and Competition in Silicon
Valley and Route 128 (Harvard University Press, 1994).

The competitive advantages of regional
clusters have become the focus of scholarly and policy attention. Once only
the province of economic geographers and regional scientists, the work of Paul
Krugman (1991) and Michael Porter (1990) has spurred widespread interest in
regions and regional development. These newcomers have ignored an already extensive
and sophisticated literature on the dynamics of industrial localization (see,
for example, Storper, 1989; Scott, 1988a, 1988b; Vernon, 1960). Yet, like their
predecessors, they share a reliance on external economies to explain the advantages
that are derived from the spatial of clustering of economic activity.

In this essay I compare California's
Silicon Valley and Route 128 in Massachusetts to suggest the limits of the concept
of external economies and propose an alternative, network approach to analyzing
regional economies. The common notion of external economies is based on an assumption
that the firm is an atomistic unit of production with clearly defined boundaries.
By drawing a sharp distinction between what occurs inside and what occurs outside
the firm, scholars overlook the complex and historically-evolved relations between
the internal organization of firms and their connections to one another and
the social structures and institutions of a particular locality. The network
perspective helps explain the divergent performance of apparently comparable
regional clusters, such as Silicon Valley and Route 128, and provides important
insights into the local sources of competitive advantage.

THE LIMITS OF EXTERNAL ECONOMIES

Alfred Marshall (1920) developed the notion of
"external economies of scale" to refer to the sources of productivity
increase that lie outside of individual firms. In the classic view, producers
derive external benefits by sharing the fixed costs of common resources, such
as infrastructure and services, skilled labor pools and specialized suppliers,
and a common knowledge base. In addition, some theorists distinguish external
economies that depend on the size of the market, including such factors as a
labor pool and specialized supplier base (pecuniary external economies) from
those that involve spillovers of knowledge between firms (technological external
economies). When these factors of production are geographically concentrated,
firms gain the additional benefits of spatial proximity, or "agglomeration
economies." Once established in a locality, such an advantage becomes self-reinforcing
through a dynamic process of increasing returns (Arthur, 1990; Krugman, 1991;
Scott, 1988b; Storper, 1989).

Students of regional development typically
treat Silicon Valley and Route 128 as classic examples of the external economies
that are derived from industrial localization. They are seen as cumulatively
self-reinforcing agglomerations of technical skill, venture capital, specialized
input suppliers and services, infrastructure, and spillovers of knowledge associated
with proximity to universities and informal information flows (see, for example,
Castells, 1989; Hall & Markusen, 1985; Krugman, 1991; Porter, 1990; Scott,
1988b). Some researchers have compared them to the 19th century industrial districts
described by Alfred Marshall (Piore & Sabel, 1984).

Yet this approach cannot account for
the divergent performance of the two regional economies. In spite of their common
origins in postwar military spending and university-based research, Silicon
Valley and Route 128 have responded differently to intensified international
competition. Both regions faced downturns in the 1980s. Although Silicon Valley
recovered quickly from the crisis of its leading semiconductor producers, Route
128 shows few signs of reversing a decline that began in the early 1980s. The
rapid growth of a new wave of start ups and the renewed dynamism of established
companies such as Intel and Hewlett-Packard were evidence that Silicon Valley
had regained its former vitality. Along Route 128, by contrast, start ups failed
to compensate for continuing layoffs at the Digital Equipment Corporation and
other minicomputer companies. By the end of the 1980s, Route 128 producers had
ceded their longstanding dominance in computer production to Silicon Valley.

Regional data underscore this divergence.
Between 1975 and 1990, Silicon Valley firms generated some 150,000 new technology
jobs--triple the number created along Route 128, even though they enjoyed roughly
the same employment levels in 1975.

In 1990, Silicon Valley-based producers
exported more than $11 billion in electronics products, almost one third of
the nation's total, compared to Route 128's $4.6 billion (Electronic Business,
1992). Finally, Silicon Valley was the home of 39 of the nation's 100 fastest-growing
electronics companies, whereas Route 128 claimed only 4. By 1990, both Southern
California and Texas had surpassed Route 128 as locations of fast-growing electronics
firms.

These rankings are based on five-year
sales growth rates, but the list is not limited to small firms. Multi-billion
dollar companies such as Sun Microsystems, Apple Computers, Intel Semiconductor,
and Hewlett-Packard all ranked among the fastest- growing enterprises in 1990.

The concepts of agglomeration and external
economies alone cannot explain why clusters of specialized technical skills,
suppliers, and information produced a virtuous and self-reinforcing dynamic
of increasing industrial advances in Silicon Valley, while producing relative
decline in Route 128. These theories account for regional stagnation or decline
through imprecise references to "diseconomies" of agglomeration or
the accumulation of negative externalities. Yet if such diseconomies are related
to the overall size of a regional cluster, the degree of congestion, or the
costs of production, growth should have slowed in the more densely populated
Silicon Valley long before Route 128. The simple fact of spatial proximity
evidently reveals little about the ability of firms to respond to the fast-changing
markets and technologies that now characterize international competition.

The distinction between internal and
external economies is based on the assumption that the firm is an atomistic
unit of production with clearly defined boundaries. Treating regions as collections
of autonomous firms has even led some observers to conclude that Silicon Valley
suffers from excessive, even pathological, fragmentation (Florida & Kenney,
1990). Proponents of this argument overlook the complex of institutional and
social relationships that connect the producers in its fragmented industrial
structure. Researchers who adopt the broadest interpretations of technological
external economies recognize that firms learn from each other through flows
of information, ideas, and know-how (Storper, 1989), but they do so only by
denying the theoretical distinction between internal and external economies,
between what is inside and outside the firm.

A NETWORK APPROACH TO REGIONS

Far from being isolated from what lies outside
them, firms are embedded in networks of social and institutional relationships
that shape, and are shaped by, their strategies and structures (Granovetter,
1985). The network perspective helps illuminate the historically-evolved relationships
between the internal organization of firms and their connections to one another
and to the social structures and institutions of their particular localities
(Nohria & Eccles, 1992b; Powell, 1987).

A network approach can be used to argue
that, despite similar origins and technologies, Silicon Valley and Route 128
evolved distinct industrial systems in the postwar period. The differences in
productive organization have been overlooked by economic analysts or treated
simply as superficial differences between "laid back" California and
the more "buttoned-down" East coast. Far from superficial, these variations
demonstrate the importance of the local social and institutional determinants
of industrial adaptation. In particular, they help explain why these two regions
have responded so differently to the same external forces, from the lowering
of global trade barriers and the intensification of international competition
to cuts in the domestic military budget.

Silicon Valley has a regional network-based
industrial system that promotes learning and mutual adjustment among specialist
producers of a complex of related technologies. The region's dense social networks
and open labor markets encourage entrepreneurship and experimentation. Companies
compete intensely while at the same time learning from each other about changing
markets and technologies through informal communications and collaborative practices.
Loosely linked team structures encourage horizontal communication among firm
divisions and with outside suppliers and customers. The functional boundaries
within firms are porous in the network-based system, as are the boundaries between
firms and between firms and local institutions such as trade associations and
universities.

The Route 128 region, in contrast, is dominated by autarkic
(self-sufficient) corporations that internalize
a wide range of productive activities. Practices of secrecy and corporate loyalty
govern relations between firms and their customers, suppliers, and competitors,
reinforcing a regional culture that encourages stability and self-reliance.
Corporate hierarchies ensure that authority remains centralized and information
tends to flow vertically. Social and technical networks are largely internal
to the firm, and the boundaries between firms and between firms and local institutions
remain far more distinct in this independent firm-based system.

Regional Networks and Industrial Adaptation

Understanding regional economies as
networks of relationships rather than as clusters of atomistic producers, and
thinking of the regions as examples of two models of industrial systems--the
regional network-based system and the independent firm-based system--helps illuminate
the divergent trajectories of the Silicon Valley and Route 128 economies during
the 1980s. For example, Silicon Valley's superior performance cannot be attributed
to differentials in real estate costs, wages, or tax levels. Land and office
space were significantly more costly in most of Silicon Valley than in the Route
128 region during the 1980s; the wages and salaries of production workers, engineers,
and managers were higher (Sherwood-Call, 1992), and there were no significant
differences in tax rates between California and Massachusetts (Tannewald, 1987).

Nor can the differences in regional
performance be traced to patterns of defense spending. Route 128 has historically
relied more heavily on military spending than has Silicon Valley, and hence
is more vulnerable to defense cutbacks; however, the downturn in the Massachusetts
electronics industry began in 1984, when the value of prime contracts to the
region was still increasing. Although defense spending cannot account for the
timing of the downturn in the region's technology industry, the military spending
cutbacks that began in the late 1980s exacerbated the difficulties of an already
troubled regional economy.

Finally, while it may be tempting to
attribute Silicon Valley's prosperity to the ability of local firms to shift
low wage jobs elsewhere, this cannot account for the differential performance
of the two regions. Technology firms from both Silicon Valley and Route 128
have, since the 1960s, moved their routine manufacturing operations to lower-wage
regions of the U.S. and the Third World (Scott, 1988b; Saxenian, 1985).

Route 128's difficulties lie in the
rigidities of its local industrial system. The independent firm-based system
flourished in an environment of market stability and slowly-changing technologies
because extensive integration offered the advantages of scale economies and
market control (Chandler, 1977). It has been overwhelmed, however, by changing
competitive conditions. Corporations that invest in dedicated equipment and
specialized worker skills find themselves locked in to obsolete technologies
and markets, and their self-sufficient structures limit their ability to adapt
in a timely fashion. The surrounding regional economy in turn is deprived of
resources for self-regeneration because large firms tend to internalize most
local supplies of skill and technology.

Regional network-based industrial systems
like that of Silicon Valley, in contrast, are well-suited to conditions of technical
and market uncertainty. Producers in these systems deepen their capabilities
by specializing while engaging in close, but not exclusive, relations with other
specialists. Network relations promote a process of reciprocal innovation that
reduces the distinctions between large and small firms and between industries
and sectors (DeBresson & Walker, 1991). Evidence from the industrial districts
of Europe suggests that the localization of know-how and information encourages
the pursuit of diverse technical and market opportunities through spontaneous
regroupings of skill, technology, and capital. The region, if not all the firms
in the region, is organized to innovate continuously (Best, 1990; Sabel, 1988).

The competitive advantages of network
organizational forms are reflected in the experience of Japanese industry as
well. Japanese producers of electronics and autos, for example, rely on extensive
networks of small and medium-sized suppliers, to which they are linked through
ties of trust and partial ownership. Although Japan's large firms may have often
exploited suppliers in the past, many firms increasingly collaborate with them,
encouraging them to expand their technological capabilities and organizational
autonomy (Nishiguchi, 1989). Like their Silicon Valley counterparts, these producers
tend to be geographically clustered and depend heavily on informal information
exchange as well as more formal forms of cooperation (Friedman, 1988; Imai,
1989).

As the case of Japan suggests, there
are large as well as small firm variants of network-based systems (Dyer, 1993;
Fruin, 1992, 1993; Herrigel, 1993). Large corporations can integrate into regional
networks through a process of internal decentralization. As independent business
units are forced by competition to achieve the technical and productive standards
of outsiders, they often rely on external institutions that facilitate knowledge
sharing and collaboration with suppliers and customers.

Of course, all economic activity does
not cluster within a single regional economy. Firms in network systems serve
global markets and collaborate extensively with distant customers, suppliers,
and competitors. Technology firms, in particular, are highly international.
However, the most strategic relationships are often local because of the importance
of timeliness and face-to-face communications in complex, uncertain, and fast
changing industries (Nohria & Eccles, 1992a).

REGIONAL NETWORK V. FIRM-BASED SYSTEMS

In the rest of this chapter I use a set of paired
comparisons to illustrate the differences in the organization and adaptive capacities
of Silicon Valley's regional network and Route 128's independent firm-based
industrial systems. The comparison of Apollo Computers and Sun Microsystems--both
1980s' generation start ups competing in the emerging workstation market--demonstrates
how small firms benefit from the open flows of information, technology, and
know-how in a network system. The comparison of the Digital Equipment Corporation
(DEC) and Hewlett-Packard Co.(HP)--the leading computer systems producers in
the two regions--in turn shows how regional networks can facilitate the reorganization
of large firms.

Clearly, these cases alone cannot encompass
the experience of two complex regional economies. For an extended treatment
of the origins and evolution of the two regional economies, see Saxenian (1994).
Nor can the focus on individual firms fully portray the myriad decentralized
relationships in a regional network-based system. Indeed, the resilience of
Silicon Valley's network system lies precisely in the fact that it does not
depend upon the success of any individual firm. However, these comparisons illustrate
the social and institutional dimensions of productive organization that are
overlooked in the concept of external economies and the competitive advantages
of regional networks in the current economic conditions.

Start Ups: Apollo Computer and Sun Microsystems

The largest wave of start ups in Silicon
Valley's history began in the late 1970s and accelerated during the 1980s. The
region was the home to scores of new ventures that specialized in everything
from workstations and semi-custom semiconductors to disk drives, networking
hardware and software, and computer-aided engineering and design. These start
ups contributed to the diversification of the regional economy away from its
original concentration in semiconductors and into a complex of computer-related
specialists.

In contrast with the upsurge of entrepreneurial
activity in Silicon Valley, the pace of start ups along Route 128 slowed during
the 1980s. Massachusetts experienced lower rates of new high-tech firm formation
between 1976 and 1986 than either New England or the United States as a whole
(Kirchoff & McAuliffe, 1988). Also, the performance of companies founded
during the 1980s was disappointing. Nothing in the Route 128 experience matched
the spectacular successes of the 1980s' generation of Silicon Valley start ups
such as Sun Microsystems, Conner Peripherals, and Silicon Graphics. By the end
of the decade, public companies that were started in Silicon Valley during the
1980s collectively accounted for more than $22 billion in sales, whereas their
Route 128 counterparts had generated only $2 billion (Standard & Poor's,
1992).

Investment decisions reflected this
divergence. Annual venture capital investments in Northern California during
the 1980s were double or triple those in Massachusetts. Over the course of the
decade, Massachusetts-based companies received some $3 billion in venture capital,
or 75% of the total raised in the region, whereas firms in Northern California
received $9 billion, or 130% of the total capital raised locally. Silicon Valley
companies were consistently awarded at least one third of the nation's total
venture capital pool.

By 1992, 113 technology enterprises
located in Silicon Valley reported revenues exceeding $100 million, compared
to 74 companies in Route 128. Moreover, the great majority of Silicon Valley's
$100 million enterprises were started during the 1970s and 1980s, whereas those
in Route 128 were overwhelmingly started prior to 1970 (CorpTech, 1993).

The comparison of Apollo Computer and
Sun Microsystems demonstrates how the autarkic structures and practices of Route
128's independent firm-based system created disadvantages for start ups in a
technologically fast-paced industry. Apollo pioneered the engineering workstation
in 1980 and initially was enormously successful. By most accounts, the firm
had a product that was superior to that of its Silicon Valley counterpart, Sun
Microsystems (which was started two years after Apollo, in 1982). The two firms
competed neck and neck during the mid-1980s, but in 1987 Apollo fell behind
the faster moving, more responsive Sun, and never regained its lead. By the
time Apollo was purchased by Hewlett-Packard in 1989, it had fallen to fourth
place in the industry, whereas Sun led the industry with more than $3 billion
in sales (Bell & Corliss, 1989).

Apollo's founder, 46-year-old William
Poduska, one of Route 128's few repeat entrepreneurs, had worked for Honeywell
and helped to found Prime Computer before starting Apollo. Not only was Poduska
himself well steeped in the culture and organizational practices of the region's
established minicomputer firms, but the entire Apollo management team moved
with him from Prime. This history contrasts with the that of the typical Silicon
Valley start up, in which talent was typically drawn from a variety of different
firms, and even industries, representing a mix of corporate and technical experience.

Not surprisingly, Apollo's initial
strategy and structure reflected the model of corporate self-sufficiency of
the region's large minicomputer companies. In spite of its pioneering workstation
design, for example, the firm adopted proprietary standards and chose to design
and fabricate its own central processor and specialized integrated circuits.
Although it sourced components such as disk drives, monitors, and power supplies,
Apollo began with a proprietary operating system and architecture that made
its products incompatible with other machines.

Sun, in contrast, pioneered open systems.
The firm's founders, all in their twenties, adopted the UNIX operating system
because they felt that the market would never accept a workstation custom designed
by four graduate students. By making the specifications for its systems widely
available to suppliers and competitors, Sun challenged the proprietary and highly
profitable approach of industry leaders IBM, DEC, and HP, which locked customers
in to a single vendor of hardware and software. This strategy allowed
Sun to focus on designing the hardware and software for its workstations and
to limit manufacturing to prototypes, final assembly, and testing. Unlike the
traditional vertically integrated computer manufacturers, Sun purchased virtually
all of its components off the shelf from external vendors and subcontracted
the manufacture and assembly of their printed circuit boards. (In the late 1980s,
Sun began assembling some of its most advanced printed circuit boards internally.)
The firm even relied on outside partners for the design and manufacture of the
reduced instruction set computing (RISC)-based microprocessor at the heart of
its workstations and encouraged its vendors to market the chip to its competitors.

Although specialization is often an
economic necessity for start ups, Sun did not abandon this strategy even as
the firm grew into a multi-billion dollar company. Why, asked Sun's Vice President
of Manufacturing Jim Bean in the late 1980s, should Sun vertically integrate
when hundreds of Silicon Valley companies invest heavily in staying at the leading
edge in the design and manufacture of integrated circuits, disk drives, and
most other computer components and subsystems? Relying on outside suppliers
greatly reduced Sun's overhead and ensured that the firm's workstations contained
state-of-the art hardware.

This focus also allowed Sun rapidly
to introduce complex new products and continuously alter their product mix.
According to Bean: "If we were making a stable set of products, I could
make a solid case for vertical integration" (Whiting, 1987). Relying on
external suppliers allowed Sun to introduce an unprecedented four major new
product generations during its first five years of operations and to double
the price-performance ratio each successive year. Sun eluded clone-makers through
its sheer pace of new product introduction. By the time a competitor could reverse
engineer a Sun workstation and develop the manufacturing capability to imitate
it, Sun had introduced a successive generation.

As a result, the Sun workstations,
although vulnerable to imitation by competitors, were also significantly cheaper
to produce and sold for half the price of the proprietary Apollo systems (Bulkeley,
1987). Sun founder and CEO Scott McNealy described the advantage for customers:
"We were totally open with them and said, 'We won't lock you into anything.
You can build it yourself if we fail,' whereas our competition was too locked
up in this very East coast minicomputer world, which has always been proprietary,
so that encouraging cloning or giving someone access to your source code was
considered like letting the corporate jewels out or something. But customers
want it" (Sheff, 1989).

It quickly became apparent that customers
preferred the cheaper, non-proprietary Sun workstations. However, Apollo, like
the Route 128 minicomputer producers, was slow to abandon its proprietary operating
system and hardware. As late as 1985, the firm's management refused to acknowledge
the growing demand for open standards and even turned down the offer of a state-of-the-art
RISC microprocessor from Silicon Valley-based MIPS Computers. Apollo finally
committed 30 percent of its research and development budget to RISC development
in 1986, but the effort became an economic burden, and the chip they ultimately
developed internally was no faster than the chip they could have bought two
years earlier from MIPS.

Sun's innovative computing strategy
was inseparable from the firm's location in the sophisticated and diversified
technical infrastructure of Silicon Valley. Apollo, in contrast, responded sluggishly
to industry changes in part because of a more limited regional infrastructure.
According to Jeffrey Kalb, an engineer who worked for DEC in Route 128 for many
years before moving to Silicon Valley to start the MasPar Computer Corp.:

It's hard for a small company to start in Route 128 because you
can't get stuff like IC's and disk drives fast. Route 128 is dominated by large,
vertically integrated firms that do everything themselves. In Silicon Valley,
you can get anything you want on the market.

You can get all those things in Route
128 sooner or later, but the decisions are much faster if you're in Silicon
Valley. From the East coast, interacting with the West coast is only possible
for 3-4 hours a day because of the time difference, and you spend lots of time
on the phone. It's no one thing, but if you get a 20-30% time to market advantage
by being in Silicon Valley, that's really significant. (Kalb, 1991)

Apollo's other major misstep was in
its 1984 choice of a President and CEO to replace Poduska. Following the tradition
of the large Route 128 companies, they hired a long-time East coast corporate
executive who had worked his way up the ranks at General Electric and then become
the President of GTE Corporation. The 53-year-old Thomas Vanderslice was asked
to bring "big-company organizational skills" to fast growing Apollo
and help the firm to "grow up." He couldn't have had a more different
background than the twenty-something graduate students and computer whizzes
who had founded Sun Microsystems two years earlier (Beam & Frons, 1985).

The media played up the superficial
differences between Apollo and Sun: the buttoned down, conservative Apollo executives
alongside the casually attired, laid-back founders of Sun. It made for great
journalism: Vanderslice enforced a dress code and discouraged beards and moustaches
at Apollo, and Sun threw monthly beer bashes and employees showed up on Halloween
in gorilla suits. Whereas Vanderslice was chauffeured to work daily in a limousine,
an April Fool's Day prank at Sun involved placing founder Bill Joy's Ferrari
in the middle of the company's decorative pond.

However, the important differences
between the two firms lay in their management styles and organization: Vanderslice
brought in a traditional, risk averse management team who focused on imposing
financial and quality controls, cutting costs, and diversifying the firm's customer
base. Former Apollo employees describe him as an archetypical "bean counter"
who established formal decision-making procedures and systems in the firm at
a time when flexibility and innovation were most needed.

This commitment to formality, hierarchy,
and long-term stability--which typified most large Route 128 companies--could
not have offered a greater contrast with the "controlled chaos" that
characterized Sun (Weiss & Delbecq, 1987). Like many Silicon Valley companies,
Sun developed decentralized organizational forms in its efforts to preserve
the flexibility and enthusiasm of a start up even as it grew. Corporate strategy
was generated by discussions among representatives of autonomous divisions rather
than dictated by a central committee and Sun's culture encouraged informal communications,
participation, and individual initiative (Levine, 1988).

In the late 1980s, when Sun surpassed
Apollo in both sales and profitability, more than a dozen Apollo managers defected
to their West-coast rival. They joined other experienced and ambitious engineers
at ailing Route 128 companies who recognized that opportunities to join or start
technologically exciting new ventures lay not in New England, but along the
increasingly crowded freeways of Northern California. As skilled engineers moved
west, the advantages of Silicon Valley's network-based industrial system multiplied.

Large Firms: Digital Equipment and Hewlett-Packard

The successes of the 1980s' generation
start ups were the most visible sign that Silicon Valley was adapting faster
than Route 128, but changes within the regions' largest firms were equally important.
Established producers in Silicon Valley began to decentralize their operations,
creating interfirm production networks that built on the region's social and
technical interdependencies and strengthened its industrial system. By institutionalizing
longstanding practices of informal cooperation and exchange, they formalized
the process of collective learning in the region. Local firms redefined themselves
by participating in local production networks, and the region as a whole organized
to create new markets and sectors.

Adaptation in the Route 128 economy,
by contrast, was constrained by the autarkic organization and practices of its
leading producers. Focused inward and lacking dynamic start ups from which to
draw innovative technologies or organizational models, the region's large minicomputer
firms adjusted very slowly to the new market conditions. By the end of the decade,
they were struggling to survive in a computer industry that they had once dominated.

Although it is very difficult to develop
accurate and useful measures of vertical integration, one indication of the
greater reliance of Route 128 firms on internal production is the lower sales
per employee figures shown in Table 1 for the leading Route 128 firms and their
Silicon Valley counterparts.

Source: "The Electronic Business 200"
Electronic Business (22 July 1991) 43-49; Annual 10K Company Reports

The comparison of DEC and HP during
the 1980s highlights the differing relationship of large firms to the region
in network and firm-based industrial systems. By 1990 both were $13 billion
companies and the largest and oldest civilian employers in their respective
regions. (Lockheed Missile and Space and Raytheon Corporation were the largest
private employers in Silicon Valley and Route 128, respectively. But both were
military contractors with limited commercial business.) Both DEC and HP were
vertically integrated producers of proprietary minicomputers with shared origins
in an earlier era of computing. Yet the companies responded differently to comparable
competitive challenges. HP gradually opened up by building a network of local
alliances and subcontracting relationships while strengthening its global reach.
DEC, in spite of its formal commitment to decentralization, retained a substantially
more autarkic organizational structure and corporate mindset.

The transformations in the computer
industry during the 1980s placed a premium on speed and focus. Computer makers
were forced to develop and bring new products to market faster than ever before,
often in a matter of months. HP Vice President of Corporate Manufacturing Harold
Edmondson claimed in 1988 that half of the firm's orders in any year came from
products introduced in the preceding three years (Edmondson, 1988). At the same
time, the cost of developing new products increased as they became more technologically
complex. Innovation in all segments of the industry--from microprocessors and
logic chips to system and applications software to disk drives, screens, input-output
devices, and networking devices--meant that it was more and more difficult for
a single firm to produce all of these components, let alone remain at the forefront
of the underlying technologies. This increasingly competitive environment
posed a challenge for established computer makers like DEC and HP. By 1990,
however, HP had successfully managed the transition from minicomputers to workstations
with open systems, whereas DEC remained dependent on its proprietary VAX line
of minicomputers. As a result, even though both enjoyed 1990 revenues from electronics
products of $13 billion, HP earned $771 million, and DEC lost $95 million.

Variations in corporate performance
always have multiple causes, but the firms' organizational structures and their
relationships to their respective regions help explain these differences. DEC
maintained clear boundaries between itself and other companies or institutions
in the region. This was, in part, a result of extensive vertical integration:
the firm designed and manufactured internally virtually all software and hardware
components for its computers internally. Moreover, DEC's corporate culture rewarded
secrecy and corporate loyalty; departed employees were typically treated like
pariahs and cut off from the corporate "family" (Rifkin & Harrar,
1990). As a result, the technical and social networks that mattered were all
internal, and there were few opportunities for collaboration, learning, and
exchange with other local firms.

HP was both less dominant in Silicon
Valley and more open to the surrounding economy. DEC dominated the Route 128
region in a way that no firm did in Silicon Valley. With more than 30,000 Massachusetts
employees in 1990, DEC accounted for almost 20 percent of regional high-technology
employment, whereas HP's 20,000 Silicon Valley employees were only 8 percent
of the regional total. HP benefitted from a long history of participation in
the region's rich associational life and fluid labor markets. Continuous and
open exchange about everything from the latest start ups to technical breakthroughs
allowed local engineers to stay at the leading edge of new computing technologies
and market trends (Vedoe, 1990).

HP's decentralized divisional structure
also offered an ideal training ground for general managers. Former HP executive
were responsible for starting more than 18 firms in Silicon Valley between 1974
and 1984, including such notable successes such as Rolm, Tandem, and Pyramid
Technology (Mitchell, 1989). A 16-year veteran of DEC who now works for HP described
how the firm's autonomous divisions preserve opportunities for entrepreneurship:

Running a business at the division level, you
get a chance to be a general manager. You get a chance to learn . . . to be
creative . . . There are a lot of new divisions springing up [within HP], new
ideas springing up, brand new businesses, and old divisions that couldn't make
it anymore transform themselves into new businesses. (P. Porter, 1993)

In contrast, DEC's matrix organization--which
represented only a partial break from traditional functional corporate hierarchies--stifled
the development of managerial skill and initiative in the Route 128 region.
The matrix demanded continuous negotiations to reach consensus, and despite
the addition of cross-functional relations among product groups, final authority
remained highly centralized (Schein, 1985). As a result, aside from Data General,
it is difficult to identify successful spin-offs from DEC.

Both DEC and HP began the 1980s with
the bureaucracy and internal conflicts typical of large firms. Both missed opportunities
and made false starts in workstation and RISC markets, and both had difficulty
keeping up with newer, more agile competitors. Yet HP quickly became the leading
producer in the fastest growing segments of the market. By 1990, HP controlled
31 percent of the $8 billion RISC computer systems market--a market in which
DEC still had no presence. HP also boasted a 21 percent share of the $7.2 billion
workstation market and 13 percent of the $33 million UNIX computer systems market,
compared to DEC's 16 percent and 8 percent respectively. In addition, HP controlled
66 percent of the market for desktop laser printers and 70 percent of the market
for ink jet printers (Nee, 1991).

Hewlett Packard reinvented itself by
investing heavily in RISC microprocessor technology and the UNIX operating system
well before most established computer companies recognized the importance of
open standards. By betting the future of the computer division (which accounted
for 53 percent of HP revenues) on RISC systems in 1985 and by undertaking internal
reorganizations that unified and rationalized the firm's disparate computer
divisions and component technologies, HP positioned itself advantageously for
emerging markets (Yoder, 1991). In 1990, for example, the firm created an independent
team to develop a RISC workstation. The ultimate product, the Series 700 workstations,
was far ahead of the rest of the industry and allowed HP quickly to become one
of the world's biggest sellers of UNIX systems. A financial analyst for Salomon
Brothers assessed the situation: "they [HP] have done an excellent job
of identifying trends in the computer market such as Unix, RISC, and PCs. No
other major computer company has done a better job of positioning . . . They
are the one company I can count on surviving. HP has a better base today than
IBM or DEC" (Greene, 1990).

HP's ability to identify market trends
early reflected the firm's openness to external changes and a Silicon Valley
location that gave it easy access to state-of-the-art information markets and
technologies. This flexibility contrasts sharply with DEC's prolonged denial
of the growing demand for personal computers and UNIX-based systems. In the
words of a former DEC marketing manager: "DEC had its head in the sand.
They didn't believe that the world would really change . . . They got focused
on the internal evolution of the company rather than on the customer or markets"
(Vedoe, 1990). As late as 1985, DEC CEO Olsen referred to personal computers
as "snake oil" (Harrar & Rifkin, 1990).

DEC was plagued by ongoing internal
conflicts and a series of costly course reversals in its efforts to enter the
workstation and open systems markets. The firm's strategy remained confused
and inconsistent even after the defection of large customers such as GE and
AT&T forced Olsen to authorize a shift to open systems and away from the
vision of a single proprietary VMS operating system and VAX architecture for
all DEC systems (DeNucci, 1990).

DEC's research lab in Silicon Valley
developed state-of-the-art RISC and UNIX technologies in the early 1980s, but
its discoveries were virtually ignored by headquarters, which continued to favor
the highly profitable VAX-VMS system (Comerford, 1992). Insiders claim that
DEC's Palo Alto lab contributed more to other Silicon Valley firms such as Sun
and MIPS than it did to DEC because their findings quickly diffused to other
Silicon Valley firms through technical papers and local industry forums (Basche,
1991; Furlong, 1991).

DEC finally decided to build its own
RISC-based workstation in 1986, following conventional wisdom within the firm
that the RISC microprocessor should be designed and built in house. It was not
until 1992, however, after a series of costly reversals, that the firm finally
introduced its own RISC processor, Alpha (Comerford, 1992). By this time, DEC
controlled only 13 percent of the workstation market (McWilliams, 1992).

The contrast between DEC's Palo Alto
Lab and its East coast operations is instructive. Engineers who worked at both
emphasize how different the two were: DEC East was internally focused, whereas
DEC Palo Alto was well integrated into Silicon Valley's social and technical
networks. According to Joe DeNucci, a former employee:

DEC definitely relates differently to the regional economy in Silicon
Valley than in Route 128. DEC is the largest employer in Route 128 and you come
to think that the center of the universe is North of the Mass Pike and East
of Route 128. The thinking is totally DEC-centric: all the adversaries are within
the company. Even the non-DEC guys compete only with DEC.

DEC Palo Alto is a completely different world. DEC is
just another face in the crowd in Silicon Valley; the adversaries are external,
firms like Intel and Sun. It forces a far more aggressive and "prove-it"
mind set. (DeNucci, 1991)

He described his years with the DEC engineering
and development group in Palo Alto:

We had an immense amount of autonomy, and we cherished the distance
from home base, from the 'puzzle palace,' and from the 'corridor warriors' and
all the endless meetings. It was an idyllic situation, a group of exceptionally
talented people who were well connected to Stanford and to the Silicon Valley
networks. People would come out from Maynard and say 'this feels like a different
company.' The longer they stayed, the more astounded they were. (DeNucci, 1991)

Tom Furlong, who headed a DEC workstation
division in Maynard before moving west in 1985, described the newly formed Workstation
Group in Palo Alto as a typical Silicon Valley start up. The group's autonomy
from headquarters allowed members to take full advantage of the local knowledge
available within the regional economy. At the same time, the group benefitted
from the financial backing and reputation of a large, well-established corporation.
By 1990, Furlong was the manager of a 275-person group. He compared his experience
working in the two locations:

It would be very difficult for me to do what I'm doing here within
DEC on the East Coast. I'm a fairly autonomous business manager out here, with
all the functions necessary to success reporting to me and the freedom to use
outside suppliers. Back East, I would have to rely on DEC's internal suppliers
and functional groups for everything.

We're like a start-up organization
here. We're not really significant to DEC, we're only contributing $.5 billion
to them, but we have the advantages of their resources and name. (Furlong, 1991)

He explained the consequences of these organizational
differences for new product development:

The same job of bringing a new workstation to market takes two times
as long in the East coast and many more people than it does here. In Maynard,
I had to do everything inside the company. Here I can rely on the other companies
in Silicon Valley. Its easier and cheaper for me to rely on the little companies
in Silicon Valley to take care of the things I need, and it forces them to compete
and be more efficient. At DEC, the commitment to internal supply and the familial
environment means that bad people don't get cut off. I had to depend on all
sorts of inefficient people back at DEC East. (Furlong, 1991)

The Workstation Group did not achieve this independent
position without resistance: "It was a huge embarrassment to them that
we had to rely on external suppliers such as MIPS. DEC takes great pride in
being vertically integrated, in having control over its entire system"
(Furlong, 1991).

DEC was ultimately unable to assimilate
the lessons of its geographically distant Palo Alto group, in spite of their
technical advances, and in 1992 transferred it back to Maynard headquarters.
Furlong and other members of the workstation team left DEC to work for Silicon
Valley companies.

HP began the decade with a comparable
level of vertical integration to DEC, but soon recognized that it could not
continue to produce everything in house. In the late 1980s, HP began outsourcing
most of the sheet metal fabrication, plastics, and machining for its computer
systems. The firm also consolidated the management of some 50 disparate circuit
technology units into two autonomous divisions, Integrated Circuit Fabrication
and Printed Circuit Board Fabrication. These divisions were organized as internal
subcontractors for the company's computer systems and instrument divisions.
They were forced to compete with external vendors for HP's business and expected
to remain competitive in technology, service, and cost to sell successfully
to outside customers.

HP also built alliances with local
companies that offered complementary technologies. During the 1980s, the firm
created partnerships with Octel Communications for voice-data integration, 3Com
for local area network-manager servers, and Weitek for semiconductor design.
An HP manager explained the acquisition of a 10 percent stake in Octel: "In
the business and office processing environment, no one company can develop everything
on its own, so we're increasingly looking at forming alliances to meet our customers'
needs" (Tuller, 1988).

The partnership between HP and semiconductor
design specialist Weitek illustrates how a large firm benefitted from Silicon
Valley's networks. Tiny Weitek, which lacked manufacturing capacity of its own,
was the leading designer of ultra-high speed "number crunching" chips
for complex engineering problems. In 1987, HP opened its state-of-the-art fabrication
facility to Weitek for use as a foundry, hoping to improve the performance of
the Weitek chips in its workstations. Realizing that the manufacturing process
at the foundry Weitek used slowed down the chips, the HP engineers suggested
fully optimizing the Weitek designs by manufacturing them with HP's more advanced
fabrication process. This culminated in a three-year agreement that allowed
the firms to benefit directly from each other's technical expertise.

The arrangement assured HP of a steady
supply of Weitek's chips and allowed them to introduce their new workstation
faster than if they had designed the chip in house. It provided Weitek with
a market, the legitimacy of a close association with HP, as well as access to
a state-of-the-art foundry. Moreover, the final product represented a significant
advance over what either firm could have produced independently. This partnership
allowed each to draw on the other's distinctive and complementary expertise
to devise novel solutions to shared problems.

HP opened itself to outside influences
during the 1980s, creating a model of a large firm that is internally decentralized
and horizontally linked to networks of other specialists. DEC's dominant and
isolated position in Route 128, by contrast, hindered its efforts to shift to
new technologies or a new corporate form. Saddled with an autarkic organizational
structure and located in a region that offered little social or technical support
for a more flexible business model, DEC's difficulties worsened.

In 1992, DEC CEO and founder Ken Olsen
was forced to resign after the company reported a $2.8 billion quarterly loss--the
biggest in computer industry history. One year later, HP surpassed DEC in sales
to claim the position as the nation's second largest computer company, after
IBM. As a final irony, in 1993 DEC moved a design team for its new Alpha microprocessor
from the East coast to Palo Alto to immerse Alpha engineers in the Silicon Valley
semiconductor community. According to industry analyst Ronald Bowen of Dataquest:
"Digital is finding the support network of other companies is very, very
limited back East. In effect, what's been happening is the people who work on
the East coast spend a lot of time flying to San Jose anyway" (Nash &
Hayes, 1993).

CONCLUSION

This comparison of Silicon Valley and Route 128
highlights the analytical leverage gained by treating regions as networks of
relationships rather than as collections of atomistic firms. By transcending
the theoretical distinction between what lies inside and outside of the firm,
this approach offers important insights into the structure and dynamics of regional
economies. It directs attention to the complex networks of social relationships
within and between firms and between firms and local institutions.

The Silicon Valley experience also
suggests that network forms of organization flourish in regional agglomerations.
Proximity facilitates the repeated, face-to-face interaction that fosters the
mix of competition and collaboration required in today's fast-paced technology
industries. Yet the case of Route 128 demonstrates that geographic clustering
alone does not ensure the emergence of regional networks. Competitive advantage
derives as much from the way that skill and technology are organized as from
their presence in a regional environment.

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